What’s the Difference between Leasing and Financing?
Jan 07, 2022
“Leasing” and “financing”: Often it seems like these terms are used interchangeably. In fact, there are differences between the two concepts. With leasing, consumers can typically keep their monthly payments low and at the end of the leasing period will either return the item or possibly have the opportunity to purchase it. However, financing will result in you owning the product immediately, but you must make monthly payments for a set period of time to avoid your purchase being repossessed.
What Is a Lease?
A lease is an agreement where one party offers their property for another to use for a set amount of time, but the other party doesn't own the property. At the end of the lease agreement, the renter or lessee must give the property back unless they are eligible to purchase the item early at a discount. If you no longer need it, you can simply return it in good condition at any time without further obligation.
What Are the Benefits of a Lease?
Monthly payments on leases are often lower than the monthly payments on financed purchases because you're only paying for the depreciation of the product, rather than the whole cost. This allows you to pay less for the item while you're still getting used to it.
There’s a Low Upfront Cost
Leasing often requires little or no money down. What you pay at the beginning of your lease is simply your first month's payment in advance. This means that you don't have to wait to save up for a down payment like you would if you were buying the item.
It’s a Low-Commitment Option
A lease allows you to test out a product without having to fully commit to owning it. If you make the number of payments defined under your lease or exercise an option to purchase it early at a discount, it’s yours! If you no longer need it, you can simply return it in good condition at any time without further obligation.
What Are the Drawbacks of a Lease?
There May Be Limits on How You Use a Product
Since you don't actually own your leased product, you need to be aware of the wear and tear that your product may incur, in order to make sure that it will be returned in the same condition as when it was leased. Excessive wear and tear can lead to extra fees at the end of your lease.
There Can Be Termination Penalties
If you decide you don't like the item you've leased, then you might have to pay termination penalties. These penalties are fees that you have to pay in order to terminate your lease agreement before the end of the term.
You Don't Build Up Equity
When you get an item through a loan, you’re building equity in that item. This means that as you make your monthly payments, you're slowly owning the product outright. When you lease an item, you generally are not building up any equity because you don't own it and will have to give it back at the end of your lease.
What Is Financing?
Financing is a form of borrowing where someone takes out a loan to purchase an asset. The idea is that you pay back the loans over time, with the income generated from the asset. What this means for your finances is that when you purchase something, you’re not paying for it in full at the moment of purchase. Instead, you’re borrowing money in order to make your payment and then paying it off in chunks over time.
What Are the Benefits of Financing?
There Are No Limits on Product Use
You’re not limited by the wear and tear that your item may incur when you finance it because you will own the product after making all of your monthly payments. This means that you can use your purchase as much as you want without having to worry about extra fees at the end of your loan.
You Can Resell the Asset
When you finance an asset, you can often sell it for more money than you paid—or at least sell it to recoup some of your money if you decide you no longer want the item. This means that even when your monthly payments are done, you still have a chance to make some money off your purchase if you decide to sell it.
What Are the Drawbacks of Financing?
It Takes Time to Build Equity
Since you’re not paying for the full cost of the item when you purchase it, it will take some time to build up equity and own the asset outright. Depending on how long your loan is, this could mean that you’re making monthly payments for a few years or more.
There Will Likely Be Fees
There are potentially many different fees in financing an asset. This is how financing companies are able to make a profit by loaning you money. It’s also important to make sure that you are aware of any fees prior to financing an item to make sure you know what amount you will be paying each month.
There Will Also Be Interest Costs
When you finance an asset, you’re also taking on the burden of the interest costs. That means you’ll be paying more for the item in total than if you had just paid for it in full. When you borrow money through financing, you’re agreeing to pay back that amount with interest. That’s how lenders make a profit.
What’s the Difference, Put in Simple Terms?
At a high level, the main difference between leasing and financing is that when you finance an asset, you are the owner from the beginning. When you lease an asset, you are simply borrowing the item until the lease term has expired or you exercise an option to purchase the item early.
How Can Acima Help?
In a credit transaction, a financial institution extends funds to you or to another on your behalf, which you can then use for a purchase. If you make a purchase on credit, you borrow the money and then make payments back to the creditor, which include finance charges such as interest.
On the other hand, when you enter into a lease agreement with Acima, Acima purchases the merchandise you select from a participating retailer. We don’t extend funds to you or on your behalf. You make lease renewal payments to Acima while using the merchandise, and you can use a purchase option to own the property, or terminate the lease at any time, without penalty. There is no interest, but you make lease payments based on the value of the merchandise and the cost of lease services.
This means you can get the stuff you need now without using credit. We also offers flexible terms to put you in control and allow you to make manageable lease renewal payments as you work towards ownership. Learn how you can shop using Acima today!
Does Acima Lease or Finance Products?
Acima helps consumers get the products they need through a lease, but Acima also makes it easy for you to own your leased item. If you make the lease renewal payments defined on your lease or exercise the option to purchase it early at a discount, then it is all yours. However, if you decide you don't need it anymore, then you can return it in good condition at any time without further obligation.
Common Questions About Leasing and Financing
Does financing build your credit?
Yes, financing does help build your credit because it’s a type of loan that credit agencies will look at when determining your overall credit score.
What does in-house financing mean?
In-house financing is when the company you’re purchasing a product from provides financing to you that does not come from a third-party lender.
Is leasing better than buying?
The answer to this really depends on your personal financial situation. If you want to keep your monthly payments low, leasing may be a better option for you. However, if you have the ability to purchase outright and want to avoid any unnecessary fees, then financing/buying could be right for you.
What is progressive leasing?
Progressive leasing is a type of lease where you make incremental payments over the life of the lease. This can be a more affordable option for some people, as it allows them to spread out their payments over time.